Dr. Bernanke’s Scorched Earth Monetary Policy Claims another Victim

It seems the Fed’s perpetual zero percent interest rate policy is not only robbing retirees and responsible savers of income; it is also costing companies billions and putting the corporate pension system at risk. Thomas Black from Bloomberg writes:

General Electric Co. (GE), Boeing Co. (BA) and 3M Co. (MMM) will join big U.S. employers in making a record $100 billion in 2012 pension contributions, 67 percent more than two years ago, as low interest rates boost companies’ liabilities.

Payments may total $400 billion from 2011 through 2015 to ease underfunding at the 100 largest defined-benefit programs, according to consultant Milliman Inc., which estimated that assets in January were enough to cover less than three-fourths of projected payouts.

“It’s been called the wall of contributions,” said Alan Glickstein, a senior retirement consultant at Towers Watson & Co. (TW) in New York. “All of a sudden this thing jumps up and stays there for a few years. That’s what it looks like — a wall.”

Companies from defense contractor Lockheed Martin Corp. (LMT) to aviation-electronics maker Honeywell International Inc. are caught in a vise: the Federal Reserve Board’s vow to keep rates at current levels until 2014 means pension plans’ fixed-income investments are stagnating just as new rules shorten the time available to shore up funding.

That’s money that won’t go back to shareholders through dividends or buybacks, or toward expansion, said Kevin McLaughlin, a pension risk management specialist with consultant Mercer in New York.

If the Fed sticks by its pledge to hold interest rates at zero through late 2014, it will mean six years of zero percent interest rates. Does anybody other than Dr. Bernanke and his Keynesian allies at the Fed believe that perpetual zero percent interest rates improve the long-term health of the U.S. economy? The Fed is sacrificing retired investors, savers, insurance companies, and the U.S. pension system in a failed attempt to revive the U.S. economy. If after four years of zero percent interest rates and trillions in freshly printed money, the economy hasn’t fully recovered, one can only conclude that the policy has failed. The Fed’s highly unusual and unsustainable loose monetary policy erodes the long-term competitiveness of the U.S. economy by creating a dependency on zero percent interest rates. One can only hope the Fed has the foresight to pull in the reins on monetary policy before it is too late.

Jeremy Jones, CFA

Jeremy Jones, CFA is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Jeremy is a contributing editor of youngresearch.com.